Ch.17 Corporation Law

Question 1

Corporation

Answer 1

type of legal entity created by the state

• Existence in law is separate from those who form it, possess shares in it or who are responsible for direction (limited ability)
• Principal use is vehicle by which large amounts of capital may be accumulated
• A person in the eyes of the law with similar rights and responsibilities to that of an individual

Question 2

Corporate is neither an individual nor a partnership:

Answer 2

Separate legal entity from its owners

Existence at law, but not material existence

Artificially created

Rights and duties delineated by law

Existence can be terminated by state

Question 3

Important characteristics of corporation:

Answer 3

Corporation is separate and distinct from its shareholders, and acts not through theme but through authorized agents

Properly authorized agent may blind corporation in contract with third parties

Shareholders possess limited liability for debts of corporation, and creditors may look only to assets of corporation to satisfy their claims

Question 4

Shareholder

Answer 4

person who holds a share interest in a corporation; a part owner

Shareholders elect directors and directors appoint officers

Question 5

Director

Answer 5

under corporation law, a person elected by the shareholders to manage its affairs

Question 6

Officer

Answer 6

person elected or appointed by the directors to fill a particular office (president, secretary, etc.)

Question 7

Control In corporations:

Answer 7

Management delegated by shareholders to elected group of directors

Directors make all decisions for corporation

Subject to limitations in the Articles of Incorporation or shareholders agreement

Shareholders cannot bind the corporation in contract (only officers and directors)

Question 8

Limited Liability

Shareholders’ losses limited to investment in corporation

Answer 8

Personal assets not subject to creditors

In event of loss, only assets available to creditors are those of the corporation

Question 9

Transfer of Interests

Answer 9

Freedom of shareholders to transfer shares
- Freely in a public or private company
- Subject to restrictions in Articles of Incorporation or shareholders agreement

Identity of shareholder as well as shareholder’s wealth are unimportant
- Once corporation issues and receives payment for shares, no further contribution can be demanded from shareholder

Question 10

Corporation has unlimited term of operation:

Answer 10

Perpetual existence

Continues even if shareholders die

May be dissolved by state or be voluntarily closed but not dependent on life or death of shareholder

Question 11

Corporation free to accumulate large amounts of capital by:

Answer 11

Issuing shares or by issue of bonds and debentures

Question 12

Corporation governed by statute under which it is incorporated:

Answer 12

Sets out conditions and rules of its operation

Rights and duties of shareholders and directors are statutory (not contractual)

Question 13

Corporate Name

Answer 13

Corporation’s name is an asset of the business

• Must not be the same as another corporation
• Last word identifies it as a corporation
  – Examples: Limited or Ltd., Incorporated or Inc., etc.
  – Distinguishes corporation from partnership
• Cannot denote connection with the Crown
• Cannot be obscene, too general, or cause confusion with existing names
• Must be clearly indicated on letterhead, business, forms, etc.

Question 14

Special-Act

Answer 14

corporation created by an Act of Parliament or legislature for a specific purpose

• Corporation has only powers specifically granted to it by the statute
• Incorporation for special purposes
  – For publish or quasi-public purposes
  – Examples:
  Construction of public utility, Crown corporations like Canada Post

Question 15

Ultra vires

Answer 15

if corporation attempts to perform something outside its powers

Question 16

General Act

Answer 16

form of incorporation whereby a corporation may be created by filing specific information required by statute

• Incorporation in all provinces requires specific disclosures and recitals in incorporation documents (depending on province):
  – Memorandum of Association OR
  – Articles of Incorporation

Question 17

Doctrine of constructive notice

Answer 17

presumption at law that everyone has knowledge of the content of all statutes

• Doctrine of Ultra Vires and constructive notice
• Protect third parties from unusual limitations on powers of directors or on corporation itself

Question 18

Indoor management rule

Answer 18

party dealing with a corporation may assume that officers have the valid and express authority to bind corporation

Question 19

The Incorporation Process

Answer 19

Process begins with preparation of application for incorporation:

1. Name of proposed corporation
2. Address of head office and place of business
3. Names of applicants (incorporators)
4. Address of the head office and place of business
5. Names of applicants (incorporators)
6. Object of corporation
7. Share capital (restrictions)
8. Any restrictions or rights attached to shares
9. Any special powers or restrictions to business

Question 20

Shareholders’ agreement

Answer 20

agreement between shareholders of a private corporation concerning management and/or future reorganization of the corporation such as a buy-out of interests

• Protects minority shareholders
• Sets “ground rules” between investors
• Often created by shareholders to guarantee long-term employment in return for accepting status of minority shareholder

Question 21

Three types of shareholder agreements:

Answer 21

1. Shareholder and corporation
2. Shareholder and the other shareholders
3. Shareholders who act as directors

Question 22

Issues arising in shareholders’ agreements:

Answer 22

Minimums of the Act must be abided by various matters, including restrictions on powers of directors, appointment and remuneration of officers, plan and budgets, etc. (see textbook)

Question 23

Shares

Answer 23

ownership of a fractional equity interest in a corporation

• Used to raise capital for corporation
• Can be fixed value or par-value
• Common or preferred
• All corporations must have some voting common shares

Question 24

Debentures (Bond)

Answer 24

debt security issues by a corporation that may or may not have specific assets of the corporation pledged as security for payment

Question 25

Priority rights should corporation default on its debts are determined by Bankruptcy Act and Personal Property Security Acts

Answer 25

Priority rights should corporation default on its debts are determined by Bankruptcy Act and Personal Property Security Acts

Question 26

The Taxation of Corporations

Answer 26

Separate entity at law and is subject to taxation on its business activities Shareholders may be taxed on dividends declared by the corporation - Tax legislation provides for dividend tax credit Corporations earnings are its own for taxation purposes

Question 27

Duties and Responsibilities of Directors

Answer 27

Must have at least one director Ownership is separate from management Directors responsible for corporation’s operations Managers of the day-to-day business Rights to declare dividends Balance needs of shareholder protection and freedom to manage in corporate best interests Relationship between directors and corporations is fiduciary

Question 28

Fiduciary

Answer 28

relationship of utmost good faith in which a person, in dealing with property, must act in the best interests of the person for whom they act, rather than in their own best interests

Question 29

Directors

Answer 29

Must disclose his or her interest in particular contract or property - Refrain from discussing or voting - Accountable at law for breach of duty

Question 30

Director must:

Answer 30

Act in good faith at all times Use care and skill in carrying out duties Exercise powers and duties honestly with a view to the best interests of the corporation Exercise powers with the care and skill of a reasonably careful and prudent person in similar circumstances May profit if disclosure to, and with approval from, the Board.

Question 31

Director may not:

Answer 31

Engage in transaction with third party that might deprive corporation from opportunity to profit - Doctrine of corporate opportunity Be in a conflict of interest Engage in any activity that might permit the director to profit at the corporation’s expense Vote on such matters as a director but may vote as a shareholder

Question 32

Doctrine of corporate opportunity

Answer 32

use of corporation information for a personal benefit to the detriment of the corporation

Question 34

Directors held personally liable for certain events that occur as a result of their actions

Answer 34

Imposed to encourage directors to comply with law General rule - liable for any loss by the corporation if the directors commit the act when it is ultra vires Perform acts contrary to the statutes - Sell shares at discount or declare a dividend that impairs capital of corporation - Store industrial waste improperly - May be liable for unpaid taxes and employee wages

Question 35

Due diligence

Answer 35

obligation on the directors to ensure that effective systems are in place to comply with the law, and to monitor the systems to ensure compliance

Question 36

Defence for directors:

Answer 36

Does the action lead to absolute liability OR Can a defence of due diligence be raised?

Question 37

Outside director

Answer 37

director who is not an officer or employee of the corporation - Paid directors not involved in day to day management of corporation - Must inform self of corporation’s business - May rely on expert reports

Question 38

Director Defence Due Diligence

Answer 38

Directors must exercise the care, diligence, and skill that a reasonably prudent person would do in similar circumstances Standard of care varies depending on the circumstances

Question 39

“Business judgement rule”

Answer 39

reluctance of the court to interfere with decisions of the board - Bad business decisions do not necessarily create director liability - Limited to cases where directors can show they informed themselves and exercised judgement - Judicial requirement of good faith and due diligence

Question 40

Sarbanes-Oxley Act

Answer 40

U.S. statute that imposes extensive duties on corporations to ensure accuracy of financial and securities information provided to the public

Question 41

Majority rule:

Answer 41

Shareholder meetings decide matters by a majority Does not protect minority shareholders - only has limited rights when misuse of power by majority Courts recognize expectations to “majority” rule: - Act objected to is ultra vires - Act personally affects rights of minority shareholders - Corporation fails to comply with procedural rules - Act constitutes a fraud on minority shareholder

Question 42

Common Law action against directors by shareholder is difficult because corporation is the body injured

Answer 42

Shareholder must take action for corporation (a derivative action) Shareholder must satisfy courts that: - Internal attempts to resolve matter have been exhausted - Actions or decision of directors were improper, and caused injury to corporation - Security for costs of action should claim fail

Question 43

Minority shareholders also protected in Canada Business Corporations Act

Answer 43

Shareholders may seek relief if directors or corporation act in a way that oppressed, unfairly, prejudices, or unfairly disregards their interests A broad standard protecting reasonable expectations of shareholders Court nay rectify matter under broad statute powers

Question 44

Events occur that limit existence of corporation:

Answer 44

Most common is inability of corporation to make a profit Corporation is solvent and may wind up its business or if insolvent, may be involuntarily dissolved Corporation ceases to exist when process complete Procedure dictated by statute

Question 45

Purchase and Sale of a Corporation Two methods:

Answer 45

Share sale - buyer buys the shares of corporation - Take the good with the bad Asset sale - buyer buys certain assets of the corporation - Can buy the good and need not purchase the undesired

Question 46

Issues of sale/purchase of corporation:

Answer 46

Tax implications for each type of sale General rule: seller likes to sell shares and buyer likes to buy assets